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February 19, 2013

Global Investing Without Stock-Picking: KeatsConnelly

Firm brings international investments to its cross-border clients

KeatsConnelly specializes in advising cross-border clients, so it’s only natural that international investing should be a part of their clients’ portfolios.

Chief Investment Officer Peter Eickelberg (left) said that the firm not only invests internationally, but “follows the abundant academic evidence that managers can’t beat the market by picking stocks.”

The firm relies on funds that passively purchase, but at the same time it doesn’t “buy everything at market weight,” he said. Instead, it considers a number of factors when making its decisions.

The investing strategy is to “look at decades of performance and boil down returns to [several] factors: what [investments] have returned and what cash has returned,” Eickelberg said. Value stocks “have tended to provide a certain amount of return, and smaller companies have produced more than large,” he said, adding that this doesn’t hold true for every stock and every market.

The international focus has been part of the firm’s approach for “as long as I’ve been here and for many years before that,” he said. “I started in 2006. [International investing at KeatsConnelly goes] all the way back to inception, probably, but at least the last 10 to 15 years.

“It’s basic thinking. The world is big place; the U.S. is probably about 45% of the world’s publicly traded equity markets, and that leaves 55% somewhere else. Why would we assume the U.S. is the best place?” Eickelberg said.

Of course, it is the country he knows best. “Unfamiliarity keeps people away,” he said.

Also, before the financial crisis, common wisdom said not to put more than 25% into foreign stocks. “Back before the crash, people believed in the Markowitz mean variance optimization—that the best tradeoff of risk/return is 25% in international stocks,” Eickelberg said. Not at KeatsConnelly. “We think, because the world is divided the way it is, and we don’t have a view on a particular country being the best place to invest, why not have all out there? So [we invest] half in the U.S. and half in the rest of the world.”

KeatsConnelly supports global diversification and opportunities, rather than focusing on a specific country or region, according to Eickelberg. “It invest[s] in all global markets with liquid trading markets,” he said, adding that it will “sometimes overweight one region for a specific reason.”

For instance, “Japan and the Pacific Rim were overweight up till a couple of years ago. We thought low interest rates would stimulate a higher return; it didn’t work that well.”

But one overweight strategy that did work was emerging markets. “We had it at a higher weight than the rest, and felt it would have higher growth,” he said. “So during the 2002–2006 era, [gains] came from emerging markets and [the sector] was higher than market weight. The market had bid it up to about the market weight, so we increased it again. About 30% of [our] foreign stock is in emerging markets.”

Using unhedged vehicles in foreign equity markets allows the firm to get an added benefit for clients: currency float. It allows currencies to work themselves out, so the firm doesn't have to pick which currency to invest in. The 30% weighting will have 30% of the currency as well, Eickelberg said.

In addition to un-hedged vehicles, the firm uses factor funds and occasionally ETFs. “The best thing is an enhanced index fund, but it’s not really an index fund because it doesn’t have to change when the index changes,” he said. “Sometimes we use ETFs if we want to weight something in particular; we go shopping for a low-cost product that gives exposure to what we want, rather than stock picking.”

Currently, “The basic core equity mix is half U.S., half non-U.S., with an overweight in emerging markets and small cap,” he said. “We’re planning to maintain tilts toward those things because of the long 10-year plus potential.”